DEFERRED%20DEVELOPMENT%20FEES

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DEFERRED DEVELOPMENT FEES
LEARN THE BASICS HOUSING TAX CREDITS
101 Critical Tax Issues in Todays Tax Credit
Transactions The Institute for Professional and
Executive Development, Inc.

• David Kavanaugh
• Nixon Peabody LLP
• 100 Summer Street
• Boston, MA 02110-2131
• Tel. [phone]
• dkavanaugh_at_nixonpeabody.com

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DEVELOPMENT FEES

• A fee to the developer for developing the
  property
• Not a contractors fee

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DEVELOPMENT FEES

• Amount of fee often restricted by state qualified
  allocation plans
• Development Services spelled out in a Development
  Agreement between the property owner and the
  developer
• Eligible Basis concerns
• Timing of payment (benchmarks)

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DEFERRED DEVELOPMENT FEES

• When Uses exceed Sources on the Source and Use of
  Funds, some or all of the Development Fee is
  deferred for later payment
• Generally, the Developer is a cash basis
  taxpayer, so it takes the Development Fee into
  income as it is paid

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DEFERRED DEVELOPMENT FEES

• The Development Fee is generally included in
  Eligible Basis even if its payment is deferred
• There must be an obligation to pay the Deferred
  Development Fee at some reasonable point

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DEFERRED DEVELOPMENT FEES

• The financial projection demonstrates that the
  Deferred Development Fee will be paid
• The Deferred Development Fee can bear interest

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DEFERRED DEVELOPMENT FEES

• Tax ramifications of having to fund the pay off
  of a Deferred Development Fee at its outside
  payment date
• Generally, the General Partner (an affiliate of
  the Developer) would contribute capital to the
  Partnership, the proceeds of which would be
  applied by the Partnership to pay to the
  Developer the unpaid balance of the Deferred
  Development Fee
• A paper transaction, but taxable income is
  generated

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POST CLOSING DEFERRED DEVELOPMENT FEE ISSUES

• Reallocation of Losses and Credits
• A. When capital accounts hit zero Deferred
  Development Fees can cause a reallocation of
  losses and credits
• Renegotiation of Deferred Development Fees
• A. Actual Cancellation of Debt Income
• B. Deemed Cancellation of Debt Income

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DEFERRED DEVELOPMENT FEES AND REALLOCATION OF
LOSSES AND CREDITS

1. Once the Capital Account of Limited Partner hits
   zero, losses and credits are allocated based on
   the lowest priority debt, which is usually the
   Deferred Development Fee
2. If Development Fee obligation is recourse or the
   Developer is related to a General Partner (80
   test) losses and credits attributable to it will
   have to be allocated to the General Partner

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DEFERRED DEVELOPMENT FEES AND REALLOCATION OF
LOSSES AND CREDITS

• Solutions
• Refinancing the Development Fee obligation with
  third party non-recourse debt will fix problem
• If Developer owns the General Partner, it can
  transfer 21 of interest to a third party. In
  doing this, the Developer is no longer related to
  the General Partner for the purposes of this test
  
• If Development Fee obligation is non-recourse,
  the Developer can transfer the Development Fee
  Note to unrelated person

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RENEGOTIATION OF DEFERRED DEVELOPMENT FEES AND
CANCELLATION OF DEBT INCOME

1. If payment of fee is forgiven, there will be a
   cancellation of debt income (CODI).
2. If terms of the Development Fee are changed, it
   can cause CODI.

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FORGIVENESS OF DEFERRED DEVELOPMENT FEES AND
CANCELLATION OF DEBT INCOME

1. If the debt is forgiven there will be
   cancellation of debt income equal to the unpaid
   balance of fee plus any accrued interest.
2. Investors do not want income. They want losses
   and credits.

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RESTRUCTURING OF DEVELOPMENT FEES CAN CAUSE
CANCELLATION OF DEBT INCOME

• Restructuring the terms of a Development Fee can
  cause CODI if it impacts the Interest Rate,
  Maturity Date, Collateral, or Guarantee
• This can get complicated, but in general if the
  amount of the Deferred Development Fee on a
  present value basis is reduced in a
  restructuring, tax advice should be sought

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RENEGOTIATING A DEVELOPMENT FEE AND ELIGIBLE BASIS

• If the Development Fee was reasonably likely to
  be paid at the end of the first year of the
  credit period, a renegotiation of the fee in a
  later year should not impact Eligible Basis.
• If the situation that resulted in the
  restructuring of the fee existed in the first
  year of the credit period, then it is possible
  that the restructuring would call into question
  whether the fee was reasonably likely to be paid
  from the onset.

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